Question

Crosby Inc. has an​ 11% required rate of return. It will not pay any dividend until the end of year 20 at which time it will begin to pay an annual dividend of​ $4.00 per share which it will hold constant thereafter. What is an estimate of the price of​ Crosby's stock ​TODAY?

Answer 1

value of stock today = $5.01

Step-by-step explanation:

given data

required rate = 11%

end of year = 20

annual dividend =​ $4.00

solution

price of the stock at the end of 19th year is

price of the stock = D ÷ r .................1

dividends are paid at the end of 20th year

we get price of the stock at the end of 19th year first

price of the stock = $4 ÷ 0.11

price of the stock = $36.36

value of stock today = 36.36 × \frac{1}{(1+r)^t} ..................2

value of stock today = 36.36 × \frac{1}{(1+0.11)^{19}}

value of stock today = $5.01